What happens on land sometimes has a big impact on ocean-going cargo. Tariffs, changes in trade sanctions and government regulations often have long-term effects on trade.
Whenever there is a battle involving trade, be it a trade war or restrictions imposed by policymakers, cargo owners find themselves on the front lines. When tariffs increase, shipping goods can become riskier as cargo owners seek alternatives. Likewise, the imposition of trade sanctions means certain ports and markets are no longer accessible. Sanctions may force cargo owners to amend their business strategies and may require transporters to find new routes by sea, land and air.
The Office of Foreign Assets Controls (OFAC) is an office of the federal government that administers and enforces economic and trade sanctions to support U.S. foreign policy and national security. OFAC maintains lists of governments or regimes, terrorists, international drug traffickers and others deemed threats to the economic, national security or foreign policy interests of the United States. Specially designated nationals (SDNs) are individuals and companies with which U.S. residents and organizations are prohibited from doing business. For U.S.-based cargo owners, that means they cannot transact business with SDNs as buyers or shippers. Similarly, insurance companies are prohibited from issuing policies to SDNs.
Penalties for violating OFAC regulations can be steep. In March 2017, a Chinese telecommunications company was fined more than $100 million for violating OFAC sanctions by exporting goods from the United States to Iran. Also in 2017, a major U.S. oil and gas company agreed to pay a $2 million penalty for signing contracts with an SDN in violation of OFAC sanctions involving trade with Ukraine.
Trade sanctions are dynamic and subject to change. Some may be lifted while others kept in place. For example, sanctions on Iran were lifted following a 2015 agreement with the Obama administration on nuclear weapons. In 2018, the Trump administration signaled its intention to withdraw from the agreement and began reimposing sanctions.
Even limited sanctions can have a significant influence on global trade. According to the International Maritime Organization, 80% of the world’s traded goods are transported by vessels. Ocean-going cargo is shipped on a massive scale. As of 2016, the volume of internationally shipped goods was 10.3 billion metric tons, and global container port traffic reached 701 million twenty-foot equivalent units, which has grown steadily for the past five years, according to the United Nations Conference on Trade and Development.
Another factor influencing trade is tariffs. These are customs duties placed on imported merchandise, which are intended to give an advantage to locally produced goods. “Most favored nation” status is a term that means the lowest tariff applicable to imported goods. Generally, countries with reciprocal trading relationships confer MFN status on each other’s exports. Trade tensions can arise when one country imposes higher tariffs or raises barriers to imports, such as the recent U.S. imposition of tariffs on imported steel and aluminum.
The World Trade Organization’s trade outlook as of April 2018 forecasts slower growth in merchandise trade volume. The WTO suggests that trade tensions are pushing down export orders and reducing container port throughput.
Cargo owners should be aware of how cargo policies address tariffs. For example, import duties are commonly covered, but export duties might not be. That is a consideration for cargo owners because the tariff must be fully paid even if the cargo is partially destroyed during the voyage. If such expenses are incurred but not insured, cargo owners may need to account for that in valuing their invoices.
A solution for disruption
Trade disruption insurance can mitigate cargo owners’ risks when facing conditions that delay delivery of goods. Such coverage can provide protection to cargo owners for net profits and extra costs and expenses arising from an insured event. Such events may include, but are not limited to, general average; storm, flood, earthquake or volcanic eruption; closure by authorities or unintentional physical blockage of a port, berth, channel, canal or waterway; and delayed or non-arrival of an overseas vessel at the port of loading and/or destination due to physical loss, damage or breakdown of the vessel. Cargo owners should discuss these risks with Tokio Marine America to determine how best to protect their interests.
Shipping cargo is a risky business, subject not only to the perils of the sea but also government policies and regulations. Better understanding the risks and exposures in cargo and working with an experienced insurance partner can help make for smoother sailing toward growth and profit. In upcoming articles, we’ll explore much more on ocean cargo risk.
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